Spain And Italy Stocks Surging, Bonds Not So Much (Again)

What's the opposite of bloodbath? Italian and Spanish stock markets are surging today - after lying S&P-like for a few days - with IBEX up over 2% and FTSEMIB up almost 1.5%, both back up to four-month highs. Now up 9% and 12% respectively since the EU Summit, they appear to be reconnecting with post-EU Summit strength from the rest of core-Europe and breaking resistance at the early July highs. Will this mark the top of the range? Who knows. Swiss 2Y rates are still negative - but well off their lowest levels - but what is most interesting is that on a day when these two nations no-short-selling-allowed equity markets are pushing to multi-month highs, their sovereign bonds (which for all intent and purpose represent the critical fulcrum security in the world) are leaking back higher in yield and not enjoying all that enthusiasm. Just as in the US, equity trading volumes have stagnated in Europe as these markets have levitated and bonds stagnated.

Italy and Spain are resurging (on their own) today...

but bonds remain far less excited about this reality...Spain...

and Italy...

and Spain's inexorable slide in volume (and range-bound existence) is very reminiscent of the US...

while the all-important curve in Spain (10Y minus 2Y) has retraced 40% of its bullish steepening bias...

In the last three months, every time Spain and Italy equities have sold off, there has been a headfake like this just before. Italy might have one more surge up to 14900 hunting for stops but then I think the big sell off starts on Monday.

That the Italian and Spanish markets are rising is not a surprise. Short-selling bans appear to help markets rise in the short-term. This makes sense from a technical standpoint. Markets need buyers and sellers to function correctly. Over a long time horizon, buying and selling match up perfectly; however, market dislocations occur all the time over the course of a few seconds, minutes or hours. During these dislocations, investors will take on risk in the hopes of profiting from them.